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Monday, 13 December 2010

so the government's books are going to show a blowout. what a surprise. not.

the latest cuts in tax & the previous ones, particularly at a time when unemployment was going up, were always going to deliver that result. had the last 2 rounds of cuts been focussed on lower income earners, they would have had a greater impact on economic recovery (as those at the bottom would spend on necessities) and they would have cost a lot less. not only that, businesses would be paying more in tax overall, as they would have been more profitable from the extra consumer spending.

the rise in GST has made the problem worse, as prices have gone up way beyond 2.5%. especially prices at the supermarket, where many items that should have gone up say 13 cents have gone up by a dollar. i know i've cut back on things just in sheer frustration of unfair price rises. i refuse to give unethical companies my custom.

yet there was a piece in the waikato times last week, which i won't bother linking to, by some expert writing about what small business owners wanted. and wouldn't you know it, the first thing he wrote about was the desire for more tax cuts. even while acknowledging that rates had gone down significantly and that even the company tax rate was going down. the latter will have gone down 5% over about 3 years. and the top tax rate has gone down 6% in 2 years.

there are 2 things about this attitude that really annoy me. first, where do these people think the money will come from for the services they want to see - faster internet, better roads, more public transport, support in times of hardship (disease-stricken kiwifruit growers, drought-stricken northland farmers, earthquake-stricken canterbury businesses), and much more? i guess many of them want to see beneficiaries starving, even though there aren't the jobs in the economy for to employ them.

the second thing is that many small businesses don't operate as companies, so they aren't subject to the company tax rate. in which case, they aren't subject to the highest tax rate until they hit $70,000 of income. and if there are 2 of them in partnership, that goes up to $140,000 in income. exactly how many small business owners are earning more than that? not a whole lot.

and even the small businesses who do have a company structure or a trust structure allocate out income to shareholders/beneficiaries by way of a shareholder salary or a beneficiary distribution. which means, again, that they aren't going to be hitting the top tax rate until over $140,000 of income.

so who benefits most from the drop in the company tax rates? large businesses and particularly foreign businesses. we are basically allowing our tax base to be eroded for the benefit of overseas shareholder. we are going to have cuts in services forced on us in the next budget, for the benefit of overseas shareholders. how is this sensible?

what's more, i'm surprised by the number of small business owners who don't even realise that only income they earn over the $70,000 is taxed at the top rate (or over $140,000 if a couple). they seem to think the whole lot is taxed at the top rate. which is, i suppose, why the tax cut message seems to sell so well to this demographic. except that many of them are never going to earn the kind of income that will give them the benefit of tax cuts, while every single one of them will suffer as public services are cut. even with the 6% cut in the top rate, a person earning $80,000 pa will have gained $600, but have lost a lot more than that in things like early childhood cuts, cuts for home help for the elderly, cuts to adult education, etc etc. who knows what will go in the next round of public service cuts.

and yes, these people will also suffere from any cuts to benefits. because when beneficiaries have less money, small businesses get less business and are less profitable. as small businesses reduce in profitability, medium size businesses suffer. and so it goes on. when you expect beneficiaries to starve, the end result can only be that businesses will starve - at least, local small & medium enterprises will.

the best way to balance the books is to raise the top tax rate & the company tax rate back up. it'll have little impact on the vast majority of nz'ers, but will have significant benefits for the country as a whole.

Indeed. Great post. (I didn't see the abusive comment, but am rather surprised a post about tax rates drew the ire of a nasty ... isn't it usually the evils of the feminist empire?) Anyway, that aside, must confess to always shuddering when I see the Govt trumpeting a spending blowout since it almost invariable is later used as an excuse to cut social programmes...

Great post. I used the exact same logic when working on the $15 min wage campaign and arguing with small business owners - increasing min wage = more income in the pockets of the lowest earners = more money to spend in stores = good for business.

Same logic also applies when talking to beneficiaries - min wage defines minimum acceptable standard of income so benefits and student allowances and supers should go up too.

Sorry, not meaning to preach. It's great to see people talking rationally about tax issues when our government seems so bent on starving the poor to feed the rich.

Oh yes, the pittance saved from creating a cultural deficit will certainly stop the hole in the dyke of our health, education and welfare systems!

I saw a stat over at Shakes the other day that put the top 1% of US earners making 25% of the nation's income. I'd love to know what that sort of figure is in NZ...and whether it stays within our borders.

Just on the minimum wage. The minimum wage isn't enough for most people to live on, particularly if you have children or other dependant. Thus the government has to step in with housing allowances and a raft of other payments. Therefore we as taxpayers are subsidising businesses who pay their employees at or near the minimum wage.

Also, there are a range of targeted tax rates for certain industries which are rarely talked about which act as a futher subsidy to business - see: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10693454

Err, except there has been empirical studies on all world economies since the 1800's(done by Harvard University no less) that clearly demonstrate that Tax Cuts actually stimulate an economy far more effectively than any other form of stimulus package. Even Obama agrees with this as he is going to keep the Tax Cuts set up by George Bush.So, you intent may be well meaning but it is wrong.The way to freedom from poverty is education and jobs.

Oh yes, take away more of our hard earned wages to go into the bottomless pit of Government.

Surely you'd support a more progressive approach like not taking the poor and flat taxes for everybody else so that there is no need for people to cheat on their taxes. After all, if you're really rich you will always try and avoid taxes if they are high.

as to your point about flat taxes, just because people will always try to avoid or break the law doesn't mean we should make it easier for them. another way to stop people cheating on their taxes is to point out that it's wrong to cheat, to have a system of catching them out when they do cheat (IRD audit unit) and punishing them when they're caught with penalties, late payment fees & interest. just like we do now, in fact.

The tax cuts were pretty much "fiscally neutral," ie they're sleight-of-hand to give people like me a generous tax cut without actually reducing the govt's income (courtesy of the GST increase funded largely by lower-income people who got jack from the tax cuts). So, while reversing them would be a good thing to do in a strictly moral sense, it wouldn't do anything to help balance the books.

exactly how many small business owners are earning more than that?

Any that are earning even close to that should change their accountant immediately - the one they've got's clearly incompetent.

except they weren't fiscally neutral AT ALL. see this post at the standard, linking to keith ng's analysis:

This is actually a tax cut. It will cost $1.085b in the next four years. The only reason they can say it’s ‘revenue positive’ by 2013/14 is by adding a line called ‘Adjustment for macroeconomic effects’. That is, they argue that tax cuts will spur economic growth, and therefore the economy will grow faster, and so it’ll be revenue positive by 2013/14.

It would be unfair to call this magic money, but at the very least, it’s entirely theoretical money. Not only can we not know whether it’s real or not now, but we won’t know whether it’s real or not in 2013/14.

it's not fiscally neutral for the country (the tax take from GST has fallen because are spending less), it's not fiscally neutral for most individuals (because prices have risen much more than the 2.5% GST rise).

but yes, reversing the cuts won't cause prices to fall back to where they were before the rise - businesses will simply keep the benefit for themselves. but still, raising taxes for those on higher incomes will definitely bring in more income for the government & help to balance the books.

as to your last comment, um what? even with complex structures, you can't hide your income unless you lie/cheat or are practising tax avoidance (illegal thanks to mr peters). in which case you're stealing from wage & salary earners who have to pay more to cover the shortfall.